The layout of each of these exhibits follows the pattern shown in Exhibit 1.4, and described in the accompanying text in Chapter 1. Detail on the justification for allocation to the right hand column of a given percentage of each cost element in the left hand column is given in Chapter 4. Whereas the underlying cost data as given in Chapter 4 cover cash flow in each of the years to 2007, the data on Exhibits 5.1, 5.2 and 5.3 are summarized as the Net Present Value (NPV) equivalent in 1988 of all cash flows in those years. Thus each summary cost figure represents the amount of capital which would have to be placed on account in the base year (1988), at a real interest rate of 6% per annum, in order to finance the construction and operation of the network from that year to 2007.
Exhibit 5.4 summarizes in a single diagram the data on the extent of the economies of scale and integration. The largest box represents the operation of the main existing telecommunications network. The two smaller boxes represent the cost of a cable television network and second telecommunications network (all expressed as the net present value in 1988 of all expenditure to 2007). In each of these two cases, the overall size of the box represents the cost of building that network in isolation, while the extent of its overlap with any other box represents the extent to which costs can be saved by integrating it with that other network. Thus the overlap between the cable television and main telecommunications network boxes indicates the amount which can be saved by building the cable television network in accordance with the HKT plans, sharing ducts with the existing telephone system. The overlap between the second telecommunications network and main telecommunications network boxes indicates the amount which is saved if the lines and switches provided by the second network were instead provided as incremental growth to the main network. Finally, the overlap between the cable television and second telecommunications network boxes represents the costs saved if the two are provided by a single operator, sharing such facilities as the main fibre optic trunk and hubs.
We draw the following three conclusions from Exhibit 5.4:
1.
2.
The construction of a second telecommunications network serving parts of the business market would result in expenditure of additional economic resources amounting to 17% of the cost of this second network, when compared with the alternative solution of retaining the telecommunications monopoly. The absolute magnitude of the cost overlap is equivalent to a once-only payment in 1988 of HK$196 million (i.e. a 1988 NPV of HK$196 million). Whether this 17% cost penalty is justified by the benefits resulting from competition is considered in section 5.3 below.
The construction of a cable television network separately from the main telecommunications network would result in expenditure of additional economic resources amounting to 18% of the total cost of the cable television network, when compared with the alternative of building the network within HKT ducts. The absolute magnitude of the cost increment is HK$445 million (1988 NPV). Whether this 18% cost penalty is justified by the benefits of a vertical integrated cable television business is considered in section 5.4 below.
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